Back to basics

Escrito el 10 marzo 2009 por Francisco López Lubián en General

In times of crisis like the one we are having, companies are encouraged to go «back to basics». That advice is very useful providing:

 1) companies know what are their basics

2) companies have good basics

Which leads us to the key question: what is a good basic in a company?  How can we know if a company is founded in good basics? The answer is neither easy, nor simple, since there are several factors to take into consideration: type of industry, sustainable competitive advantages, management team profile, external circumstances, etc.

Without the intention of being exhaustive, let me share with you some elements I believe should be considered in any identification of good basics in any company:

a) Management is about taking decisions and implementing them. Base those decisions on the expected economic value, not only in the accounting value.

b) Resources used have a cost

c) Do not forget the associated risk of any business decision

d) Expectations depend on external and internal factors. To improve expectations through internal factors we have to generate confidence, which means delivering.

e) Growth does not necessarily mean economic value creation

f) Know the economic profitability of your customers, not only the accounting profitability

g) Reward management according economic value created, not only for the accounting profit

h) With short term outlook, focus on economic feasibility. With a long term perspective, look for economic value and economic profitability.

As mentioned in a classic textbook on valuation (Valuation, Copeland, Koller and Murrin): 

«Becoming a value manager is not a mysterious process that is open to only a few. It does require, however, a different perspective from that taken by many managers. It requires a focus on long run cash flows returns, not quarter-to-quarter changes in earnings per share»


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